TMI Blog2006 (3) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... he product obtained from the appellant-company and that the amount of Rs. 6 crores was paid for granting such rights. 3. The learned CIT (Appeals) ought to have appreciated the submission of the appellant that the amount of Rs. 6 crores received from PFIZER Ltd. is a capital receipt in nature not liable to tax. 4. The learned CIT (Appeals) ought to have appreciated the contention of the appellant that reading of various clauses of the agreement makes it clear that the amount of Rs. 6 crores under consideration is received by the appellant not for supply of vaccines, nor for transfer of any capital asset including any intangible rights. 5. The learned CIT (Appeals) ought to have appreciated that the nature of receipt of Rs. 6 crores under consideration is a non-competition fee and has also the effect of loss of source of revenue and hence is not liable to tax." 3. Facts of the case in brief are as follows 3.1 Assessee is an undertaking engaged in manufacture and sale of Hepatitis-B vaccine under the trade name Shanvac-B. The assessee has its own in-house R D facility and was the first in India to manufacture the vaccine right from basic stage. During the previous ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting business by taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt - CIT v. Manoranjan Pictures Corpn. Pvt. Ltd. [1997] 228 ITR 202 (Delhi). (3)There was no sale of any capital asset or goodwill, hence the amount of Rs. 6 crores received by the assessee cannot be termed as a capital receipt. (4)Agreement with PFIZER Ltd. is conscious decision taken by the assessee keeping in view the business expediencies hence the assessee cannot contend that it willingly allowed PFIZER Ltd. to compete with itself in the territory of India. (5)Loss of source of income occurs only when a livelihood is taken away or when the assessee is prevented entirely from production of Hepatitis-B. As long as the assessee is able to produce the vaccine and market it freely, along with other competitors, it cannot be said that there is a loss of income. In fact, the assessee is getting benefited by selling the vaccine in bulk to PFIZER Ltd., which is acting as a wholesale purchaser. (6)By selling the Hepatitis-B vaccine in bulk to PFIZER Ltd., assessee can concentrate on markets (domestic and foreign) un-traversed by PFIZER Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight for any new vaccine developed/ manufactured by the appellant-company (3) PFIZER has right for being appointed exclusive co-marketer for any new product developed by the appellant company or right of first refusal. The consideration paid the appellant-company is in view of these conditions. (2)Non-compete fee is a compensation payment received by a person for agreeing not to compete in business. The amount received by PFIZER is a compensation for the loss of income of the appellant as the sale foregone by entering into the co-marketing agreement. In para 7 it is stated that the consideration is received for granting the right to compete. (3)It is not a payment in the nature of a non-compete fee paid to the appellant-company. (4)In the agreement entered into, there is on restrictive covenant placed on the appellant-company from marketing its products. The appellant-company is free to market its vaccine under its brand name Shanvac-B." 3.5 Hence, the assessee preferred this second appeal before us. 4. The learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that the amount of Rs. 6 crores received by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a payment of Rs. 6 crores to SHANTHA. ( h )If the agreement with PFIZER is terminated on account of any default on the part of SHANTHA, then the amount of Rs. 6 crores is repayable to PFIZER. The amount of repayment shall be, 66.67 per cent if the termination is within two years, 33.33 per cent if the termination is during the 3rd year and " nil " if the termination is thereafter. ( i )The agreement is valid only for Indian territory. ( j )The agreement can be terminated by PFIZER without assigning any cause. However SHANTHA can terminate the agreement only for breach of terms or default by PFIZER. The agreement can be terminated by either party if the aggregate purchases by PFIZER Ltd. during the first three years is less than 4.5 million doses. Further in such an event SHANTHA shall pay Rs. 2.5 crores to PFIZER. ( k )The various terms and conditions of the agreement survive the till termination of the agreement." Our specific attention is also invited to the preamble of the agreement and paras 1.14, 1.16, 2.1, 2.2, 3.1, 3.2, 5.1, 5.2, 5.3, 7.1, 7.2, 8.1, 8.2, 13.1, 13.2, 13.4, 13.6, 17.1, 17.2, 20.1 to 20.5, which according to him are relevant for determining the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.1 of the impugned assessment order, wherein observing that by the co-marketing agreement in question assessee merely allowed M/s. PFIZER Ltd. to market the vaccine produced by it under the latter s brand name, and as such it was not surrendering of the assessee s right either to manufacture the vaccine or to market the same by itself, in the territory of India, and consequently, it cannot be said to be a compensation for loss of source of revenue, it is submitted that the above findings of the Assessing Officer are erroneous. It is submitted that in the present case the source of revenue is not the right to manufacture, but it is the right to sell. In this regard, he also invited our attention to para 2.1 of the agreement which grants exclusive co-marketing rights to PFIZER. The right granted therein, according to him, is the right to promote, market, distribute and sell the products. Therefore the assessee s right to exploit markets is impaired. The trade structure under consideration is the right to exploit the market which is definitely affected as is demonstrated by various statistics furnished by the assessee during the course of assessment proceedings itself. It is also sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to stock in trade or any trading operations of the company. 4.7 Further, referring to paragraph 4.3 of the Assessment Order, wherein the Assessing Officer observed that the price realization from PFIZER is more than the price realized by the assessee from its customers, and in such circumstances if PFIZER is paying more per unit of vaccine the co-marketing agreement is beneficial to the assessee and consequently, it cannot be said that the agreement is detrimental to the trade structure of the assessee, learned counsel submitted that this observation on the Assessing Officer is misdirected and misleading. He submitted that even though it is a fact that the goods manufactured and sold by the assessee to PFIZER have resulted in higher price realization, at the same time the assessee has also lost a substantial share in the market. The compensation received by the assessee is relatable to such loss of market. Therefore, he submitted, there is absolutely no relationship between the higher price realization for the goods sold and the compensation received for loss of source of revenue. These two are two different and independent streams of receipt and one cannot be mixed up with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... look to the nature and character of a receipt or payment to decide the treatment for tax purposes. Therefore, he pleaded that the accounting treatment made by PFIZER has no relevance to decide the issue under consideration. In fact, he submitted that the treatment given by PFIZER in the books of account supports the contention of the assessee, as it has to be noted that PFIZER has not debited the payment as cost of goods in which case it would have meant receipts for transfer of stock in trade by the assessee, which is the main contention of the department. PFIZER has accounted the payment as deferred revenue expenditure, which is normally done in the case of cost of acquiring intangible rights as in the present case. The learned counsel for the assessee also disputed the correctness of the observation of the Assessing Officer that PFIZER is not differentiating between the payment of Rs. 6 crores and payment on account of purchase of vaccine from the assessee is totally incorrect and contrary to the facts of the case noted by the Assessing Officer himself. 4.10 With reference to para 4.4 of the Assessment Order, wherein the Assessing Officer observed that the marketing survey d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Order wherein the Assessing Officer noted that the fall in per unit cost of production of the assessee, which is a general phenomena in the general market on account of entry of national and international players into Hepatitis-B vaccine market, could also be reason for reduction in turnover, and nevertheless assessee is free to take steps to increase its sales both domestic and foreign, and just because its turnover got reduced, it cannot be said that there is a loss of source of revenue, the learned counsel for the assessee submitted that the observations of the Assessing Officer in this behalf are totally incorrect and based on surmises, as the reduction in sales is entirely due to market forces and competition by PFIZER and has nothing to do with the cost of production. According to him, the reduction in turnover is consequential to the co-marketing agreement, and in terms of it the assessee by allowing PFIZER to compete with itself, has reduced its access to the markets which has resulted in loss of market share and loss of trading stricture or loss of source of revenue. The compensation received for such loss, it is reiterated, is capital in nature. 4.12 Disputing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictures Corpn. (P.) Ltd. s case (supra) relied upon by the Assessing Officer, he pleaded, is totally distinguishable and is not applicable to the present case. 4.14 Disputing the finding of the Assessing Officer that there was no sale of any capital asset or goodwill and hence the amount of Rs. 6 crores received by the assessee cannot be termed as a capital receipt, the learned counsel submitted that a capital receipt can arise in several ways and sale of capital asset or goodwill is not the only method. 4.15 Further disputing the finding of the Assessing Officer that agreement with PFIZER Ltd. is a conscious one taken by the assessee keeping view the business expediencies hence the assessee cannot contend that it willingly allowed PFIZER Ltd. to compete with itself in the territory of India, the learned counsel submitted that the sale of vaccine in bulk to PFIZER and the loss of source of market are two different aspects and should not be mixed up. Though it is true that the assessee has received a price in consideration for sale of bulk vaccine of PFIZER and the same has been duly disclosed as part of trading receipts by the assessee, he pleaded, the claim of capital r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer that in this case the assessee has not given up its profits earning structure, but only co-opted PFIZER Ltd. as a co-marketer to sell a part of the vaccine produced by it, may be in the later s brand name and that this does not cause extinction or sterilization, partly or fully, of the profit earning source of the assessee and in such a case, there is no question of loss of source of income, the learned counsel reiterated that the co-marketing agreement is not an agreement for merely selling part of the vaccine produced by the assessee to PFIZER as the said co-marketing agreement also has granted valuable rights of co-marketing to PFIZER, which has resulted in damage to the trading structure of the assessee. 4.19 Disputing the finding of the Assessing Officer that even if the agreement is terminated/expired, such termination/expiry leaves the assessee free to carry on its trade, the learned counsel for the assessee submitted that if the agreement is terminated the assessee may be free to carry on its trade, but by that time it would have lost substantial market share and it would be highly difficult to re-capture the same. Hence, according to him the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th itself in the territory of India. He submitted that loss of source of income occurs only when a livelihood is taken away or when the assessee is prevented entirely from production of Hepatitis-B, whereas in the instant case there is no loss of livelihood because as long as the assessee is able to produce the vaccine and market it freely, along with other competitors, it cannot be said that there is a loss of income. In fact, he pointed out the assessee is getting benefited by selling the vaccine in bulk to PFIZER Ltd., which is acting as a wholesale purchaser. By selling the Hepatitis-B vaccine in bulk to PFIZER Ltd., assessee can concentrate on markets (domestic and foreign) untraversed by PFIZER Ltd. The assessee can also take steps to increase its market share. In this case, he pointed out that the assessee has not given up its profit earning structure, but only co-opted PFIZER Ltd. as a co-marketer to sell a part of the vaccine produced by it, may be in the latter s brand name. This does not cause extinction or sterilization, partly or fully, of the profit earning source of the assessee and in such a case, there is no question of loss of source of income. Even if the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 400 (SC), it was held that ordinarily compensation for loss of an office or agency is regarded as a capital receipt, but this rule is subject to an exception that payment received even for termination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. Thereafter the court held that it was difficult to lay down a precise principal of universal application but various workable rules have been evolved for guidance." 6.3 Before we dwell on the issue, we think it necessary to take cognizance of the complexities of the present day commercial world, the importance of "Brand" and its commercial value. It is said that Indians are becoming brand conscious . Multi-national brands are flooding the market and in this competitive world, a fact that cannot be denied is that Brand does matter . Even in professional fields, foreign law firms or even foreign Accountancy firms, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company as long as acquisition of brands and dealing with them is not the normal course of business of an assessee. 6.7 With this background, we examine the salient features of the co-marketing agreement between SHANTHA and PFIZERs. Ltd. dated 14-2-2000, which in our opinion are fundamental to the decision in this case, are extracted below for ready reference "Whereas : A.SHANTHA manufactures, promotes and sells a Hepatits-B vaccine under the trademark SHANVAC tm-B within India, amongst other countries. B. PFIZER wishes to purchase quantities of the vaccine from SHANTHA in order to promote, market, distribute and sell them throughout India under a separate trade mark owned by PFIZER. C.The parties desire to co-operate on certain technical and scientific matters. D.PFIZER desires to have, and SHANTHA is willing to consider granting certain options and rights to new products subject to mutually acceptable terms. .................................. 1. Definitions .................................. 1.10 "PFIZER Brand" shall mean the Product which is manufactured by SHANTHA under a manufacturing license referencing a trade mark selected by PFIZER and supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to manufacture the Products solely at the Hyderabad Facility and sell the PFIZER brand solely to PFIZER. PFIZER agrees to purchase from SHANTHA such quantities of the PFIZER Brand as will be sufficient to meet all of PFIZER s requirements for the sale and distribution of the PFIZER Brand in the Territory. 3.2 Other Hepatitis-B Vaccines. Neither PFIZER nor any of its Affiliates shall promote, market, distribute or sell a Hepatitis-B vaccine for human use in the territory other than the PFIZER Brand. Neither SHANTHA nor any of its Affiliates shall promote, market, distribute or sell a Hepatitis-B Vaccine for human use in the Territory other than the SHANTHA Brand. 3.3 Specifications. The PFIZER Brand shall be supplied hereunder in finished dosage form and packaged according to the specifications set out in Schedule A as amended from time to time by mutual agreement upon the reasonable request of either party. SHANTHA may not change such specifications without consulting with and receiving the prior written consent of PFIZER. The shelf life of the PFIZER Brand shall be the longer of three years and the shelf life of the SHANTHA Brand. Provided PFIZER complies with section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due and payable on the execution and delivery of this Agreement; ( b )20 million rupees, due and payable on the later of ( i ) the date which is two months after the execution of this Agreement and ( ii ) the date on which SHANTHA obtains written confirmation of a manufacturing license authorising it to manufacture the PFIZER Brand for sale under PFIZER s trademark; and ( c )20 million rupees, due and payable on the date which is two months after the later of the dates referred to in section 7.1( b ). 7.2 Payment Procedure. Each such payments shall be made in accordance with section 9.3. 8. Prices for the Product 8.1 Prices of Commercial Product. Subject to the other provisions of this section 8 and the provisions of section 13, the prices to be paid by PFIZER for the PFIZER Brand purchased for commercial sale shall be those listed in Schedule B. Such prices do not include the costs of shipment, transit insurance or sales tax, which shall be borne by PFIZER. 8.2 Supply of Bonus Goods. If during any period of time, SHANTHA supplies units of the SHANTHA Brand as bonus goods free of charge to its customers or as physicians samples, SHANTHA shall supply PFIZER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the two parties will finalise, execute and exchange the necessary documents as soon as possible and in any event within three months after the date of PFIZER s acceptance. 13.4 PFIZER Trademark. PFIZER may market and/or sell the PFIZER Brand under any name, mark, trademark, logo, lettering, layout, colour scheme, get up, device or the like (hereinafter referred to collectively as the "Trademarks") as it may from time to time determine. SHANTHA shall supply PFIZER with PFIZER Brand bearing such trademarks. PFIZER may freely alter the Trademarks from time to time, provided any new Trademark is not identical to or confusingly similar to the SHANVAC TM -B trademark. PFIZER currently plans to use the trademark HEPASHIELD TM . 13.6 No SHANTHA Rights SHANTHA shall not, and shall not be deemed to have or acquire any right, title or interest of any kind in any art or aspect of the Trademarks used on or applied to the PFIZER Brand, even though the Trademarks or any part thereof may have been suggested by, or adopted at the substance of SHANTHA. 15.1 Inspections - ( a ) During regular business hours and upon at least 7 days advance notice (except in the case of emergencies), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... THA will ( a ) keep PFIZER reasonably informed of SHANTHA s progress in developing any such vaccine, ( b ) give PFIZER access to all registrations and technical information relating to the vaccine, and ( c ) file an application for a separate manufacturing license for a brand of the vaccine that could be co-marketed by PFIZER, in addition to and simultaneously with the application for a manufacturing license filed by SHANTHA for its own brand. PFIZER may exercise the option for any such vaccine at any time within six months after SHANTHA obtains the manufacturing license for the vaccine. If PFIZER exercises its option for any such vaccine, unless the parties agree otherwise, the terms of this Agreement (as supplemented by an agreement on the prices at which SHANTHA supplies the vaccine to PFIZER) shall apply to the new vaccine except that no payments shall be required under section 7 other than those already provided for and paid for by PFIZER. 17.2 Rights to other new products in the Territory. If at any time during the term of this Agreement SHANTHA develops, manufactures and/or acquires the right to market any new product other than those to which section 17.1 applies, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws and regulations. ..... (J)SHANTHA has not granted, and will not grant during this Agreement, any rights to any third party relating to the Product that would conflict with the rights granted to PFIZER under this Agreement. ................ 20(2)( c ) PFIZER shall have the right to manufacture the product or a competitive product or source the Product or a competitive product from a third party, and to continue to promote, market, distribute and sell the PFIZER Brand or such competitive product throughout the Territory without any further financial or other obligations to SHANTHA. To assist PFIZER in this regard, upon PFIZER s request SHANTHA shall surrender the manufacturing licnese for the PFIZER Brand. .............. 20(4) Termination by PFIZER without Cause PFIZER may terminate this agreement without cause upon 60 days advance written notice. However, if PFIZER so terminates this Agreement, for a period of two years from the date of termination PFIZER shall not use in the Territory (a) the brand name "HEPASHIELD" or (B) any other brand name PFIZER may elect to use in lieu of the "HEPASHIELD" brand name to identify a PFIZER Brand marketed by PFIZER under this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the price charged by SHANTHA from PFIZER, shall not exceed 50 per cent of the price charged by SHANTHA to its wholesalers and there shall be supply of bonus products. The brands are different and PFIZER was particular that the product to be sold in its brand name shall be produced at SHANTHA s manufacturing facility, subject to certain specifications and shall be subject to quality control, both in the manufacturing, packing and subsequent stages. In this sense, this agreement was for the betterment of the assessee-company, so that it could expand its manufacturing operations. All the case laws relied upon by the assessee related to situations where there was a termination of certain agency, or receipt of non-compete fee etc. and not where agreements were entered into with an intention to have a stimulating effect on the sales. The situation and facts that have been dealt in those cases are different from that of this case. In this case, PFIZER brand is promoted by sourcing the product from SHANTHA and certain different types of restrictive covenants were agreed to along with transfer of certain existing and future rights. Consideration is separately specified for purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, then PFIZER shall have the exclusive option of becoming exclusive co-marketer of that future product, in other words, a payment by PFIZER for a future right, which SHANTHA may invent, develop or acquire. PFIZER retains the choice to exercise the option of acquiring right of marketing under its brand name such future combination vaccine. PFIZER is given the right of first refusal for such future combination vaccine; ( c ) granting of exclusive negotiating right and rights of first refusal in terms of section 17.2. Under this clause, if SHANTHA develops or manufactures any new product, other than those mentioned in section 17.1, then PFIZER, by virtue of this payment, acquired certain rights in such products, which includes exclusive co-marketer right as well as right of first refusal. SHANTHA s right to grant any right to promote, market, distribute or sell new product to a third party is taken away. Further, we observe that at the end of the agreement, i.e. after 15 years, as per clause 5.3 read with clause 20( c )(2), PFIZER shall have the right to manufacture the Product or a competitive product or source the Product or a competitive product from a third party. In other wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B are the profit-making apparatus of this company and these are partially impaired by this agreement. 6.11 It is well known that SHANTHA Biotech, after extensive research has pioneered a domestic version of Hepatitis-B Vaccine. Till the time, this company had successfully developed and marketed the first indigenous vaccine for Hepatits-B, as an import substitute, our country was importing the vital vaccine at huge cost. It is a known fact that the Managing Director of this company has been awarded Padmabhushan by the Government of India in recognition of his pioneering work. It cannot be denied that the formulations invented by this company, the secret knowledge acquired by it, technical know-how and information and the manufacturing process, specification, quality control, etc. constitute valuable commercial rights. Patents and trade marks have been obtained by SHANTHA for this product. There is no doubt in our mind that these rights are commercial assets of SHANTHA and these are definitely a source or means through which the assessee carries on its business. These assets are being exploited to earn income. These assets are not SHANTHA S stock-in-trade or its current asset. SH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As can be seen from Clause 20.4 of this agreement that PFIZER may terminate this agreement at any time without any cause. The payment is itself provisional and contingent and subject to refund on the happening of an event. Thus, we have no hesitation in coming to a conclusion that the amount of Rs. 6 crores has been received by SHANTHA from PFIZER in pursuance of a covenant 7 in the agreement dated 14-2-2000 is for the purposes of transfer of certain bundle of rights in its capital assets, which are intangible in nature as well as for accepting certain restrictive covenants. Moreover, in addition to this, SHANTHA has given up certain rights not only present, i.e., which are already possessed by it, but also certain future rights that may come into its possession. Rights given up by SHANTHA are under clause 2.2 are ( a ) not to grant any third party right to market, distribute or sell products, ( b ) to refrain from selling Bulk Vaccine to any parties; right to supply SHANTHA brand to Nursing Home, etc. with shipments containing more than 1,000 10 ml. vials of product (or equivalent amounts of other vials) with the name of the purchaser. It has taken up the obligation to supply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to do so was part of the assets of the business. Was it circulating capital? My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the Second Book of his Wealth of Nations , which appears in the chapter on the Division of Stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line of demarcation is. Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense. My Lords, in the case before us, the Appellant, of course, made profit with circulating capital, by buying coal under the contracts he had acquired from his father s estate at the stipulated price of fourteen shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquired as a result of his activities and that asset got destroyed because of the compromise decree and the amount received in pursuance thereof was a capital receipt. Proposition laid down is "It is now well-settled that a distinction has to be drawn between a payment made for past services or discharge of past liabilities and that made for compensation for termination of an income producing asset. The former does not lose its revenue nature but the latter being a payment for destruction of a capital asset, must be considered as capital receipt." This was a case of receipt, which fructified consequent to termination of an agreement, and not a receipt in pursuance of an agreement entered into, as in this case. 6.15 The case of CIT v. Bombay Burmah Trading Corpn. Ltd. [1986] 161 ITR 386 (SC), was also on the issue of termination of leases consequent to which compensation was paid to the assessee for residuary rights under lease in the shape of logs. Here also, the Supreme Court reiterated the concept of circulating capital and fixed capital and held that "Normally in trade, there are two types of capital, one circulating capital and the other fixed capital. Fixed cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) and in return, some amount was paid to the assessee. The Hon ble Supreme Court held that the amount so received by an assessee was in consideration for giving up certain rights to purchase or to operate. It was held that it was not for settlement of rights under a trading contract, but the injury was inflicted on the capital asset of the assessee and giving up the contractual right in the hands of the assessee was a capital receipt. Quoting the ratio laid down by the Supreme Court in the case of CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148 , the Hon ble Supreme Court reiterated, the principle that if the agency is considered as a circulating capital, then the receipt in pursuance of the same would be revenue receipt, but if it is a capital asset in the hands of the assessee, then the receipt in pursuance of it would be a capital receipt. 6.17 In the case of Addl. CIT v. (K.P.) (Dr.) Karanth [1983] 139 ITR 479, the jurisdictional High Court was considering a case where the assessee had considerable experience, knowledge and know-how in the manufacture of drug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or compulsory cessation of the agency or office. It was stated that where compensation was paid for cancellation of a contract, which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue; whereby the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. 6.19 In the case of CIT v. Shamsher Printing Press [1960] 39 ITR 90 , the Supreme Court was considering a case where the assessee was required to vacate his premises on a requisition by the Government and shift its place of business during the duration of war. The Government had paid a certain compensation and the question was whether this compensation was a capital receipt or a revenue receipt. The Hon ble Supreme Court held that the receipt was not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was to be distributed amongst other partners. Besides the above, the assessee also signed two more agreements with the producers of two films, namely SJ and AS, for their distribution, exploitation and exhibition. For the exploitation of the said two films the assessee entered into another partnership, FE, with ten other partners. In this firm also, the assessee held 25 per cent share and was also entitled to 5 per cent commission on the collections of the films for the work performed on behalf of the firm. Subsequently, the assessee sold its interest in the above two firms to G and VS and received Rs. 30,350 for EF and Rs. 32,000 for FE by way of compensation for the unexpired period of the contracts with the producers of the aforesaid films, taken over by the two firms, with the result that the assessee ceased to be a partner in the said two firms. The assessee claimed this amount as capital receipt but the same was negatived by the Court. After discussing the various case laws, the Court was of the view that the compensation was paid not for preventing the assessee from carrying on his own business, but one paid in the course of business and that the agreement cancelled could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was not by way of compensation for loss of any contract or profit, but for parting with a capital asset, described above, possessed by it. Hence, this decision is also of no avail to the Revenue. 6.24 So also, in the cases before the Madras High Court in Chemplant Engg. (P.) Ltd. v. CIT [1988] 234 ITR 23, the amount received by the assessee was found to be by way of compensation for loss of commission income. Similarly, in CIT v. Dr. R.L Bhargava [2002] 256 ITR 42 before the Delhi High Court, the amount received by the assessee was found to be by way of consideration for imparting know-how and not for parting any capital asset. That being so, these decisions relied upon by the Revenue also do not come to its aid. 6.25 The decisions of the Madras High Court in EID Parry (I) Ltd. v. CIT [2002] 258 ITR 404 ; of the Apex Court in Sunil Siddhartha Bhai v. CIT [1985] 156 ITR 509 ; and of the Apex Court in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178, also relied upon by the Revenue, lay down certain principles for determining the nature of a transaction and the need to read the documents in their entirety for determining the nature of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st its being understood as deciding that the compensation paid for cancellation of an agency contract must always and as a matter of law be held to be a capital receipt and it made the following pertinent observations : Such a conclusion will be directly opposed to the decision in Kelsall s case* and Commissioner of Income-tax v. South India Pictures Ltd. ** The fact is that an agency contract which has the character of a capital asset in the hands of one person may assume the character of a trading receipt in the hands of another, as, for example, when the agent is found to make a trade of acquiring agencies and dealing with them. The principle was thus stated by Romer, L.J., in Golden Horse Shoe (New) Ltd. v. Theurgood*** " (1938) 321 Tax Cas. 608; ** (1956 ITR 910); and *** (1933) 18 TC 280. We, therefore, hold that the manner in which payee had treated this payment in its books of account does not in any way help in coming to a conclusion as to whether the receipt in question was a capital receipt or a revenue receipt. 6.28 It is difficult to find a decided case with identical facts. The Hon ble Delhi Bench of the Tribunal in the case of Ms. Payal Kapur v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on the business (trade)". The facts of the case and the decision given is as under : "A Dutch company and the appellants, who were competitors in the manufacture and dealing in margarine, in order to end the competition, entered into an agreement in 1908, by which they bound themselves to work in friendly alliance and to share their profits and losses in accordance with an elaborate scheme therein specified; further, that they would promote the commercial, pecuniary, buying and selling and other interests of the two companies. In 1913 another agreement was entered into modifying the original basis of ascertaining and sharing profits, and subject thereto, the provisions of the agreement of 1908 were to remain in force until December, 1940. During the war the agreements were not operated, but in 1920 a third agreement was made modifying the two previous agreements as to the basis of profit sharing, extending the branches of the business, and again continuing the principal agreement of 1908 till December, 1940. In 1927, three agreements were made, under which the appellants agreed to determine agreements of 1908, 1913 and 1920 in consideration of the payments to them of 4,50,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision was also made for the setting up of representative joint committee which was empowered make arrangements with outside companies and firms as to the selling and buying prices of margarine and the limitation of areas of supply. It shall be true and loyal to the other of them and shall do all in the power of such company to promote the commercial, technical, pecuniary, buying and selling and other interests of the parties hereto in relation to margarine business". It is not necessary to set out the detailed provisions of the agreement, but its elaborate character (with numerous sub-heads) and five schedules and extends to twenty two pages of print in the case before Your Lordships." Their Lordships after review of a relevant case law held that compensation was a capital receipt with the following observations "The three agreements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business, nor were they merely agreements as to how their trading profits ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
